The FCA (Financial Conduct Authority) recently highlighted concerns regarding people taking money from their pension drawdown without seeking professional financial advice.
From the age of 55 you can access money from all private pensions and many types of company schemes. Drawdown has become the most popular means to generate retirement income, with many preferring the flexibility of keeping their pension money invested and accessible rather than locking it into an annuity, which would provide a guaranteed lifetime income. Flexible drawdown also enables any residual pension pot to be passed on to chosen beneficiaries
The risks of drawdown are that people make bad investment decisions, do not manage the money well, or take too much out of their retirement pots, thereby putting their retirement income at risk.
A review by the FCA found that as demand for drawdown has risen, many individuals struggle with the complexity of the decision-making required, despite the information provided on retirement income by their pension companies. This is primarily due to the advent of pension freedoms, where some people appear not to be fully engaging with the information and are therefore potentially putting themselves at risk of harm.
The FCA raised concerns that pension savers making decisions without advice could be exposed to investments that are too risky for them, or which do not create enough investment return.
Ultimately, we are not surprised by the FCA report’s findings; this is an area which can require considerable research and assessment which is by no means easy, and additionally requires a defined and diversified investment strategy which is regularly reviewed.
The issues are further compounded by the fact that in the past the amount an individual could draw down from their retirement pot was limited by Government Actuarial Department limits, but the pension freedoms lifted that restriction.
This lack of proper advice and, as one commentator has put it, the ability to ‘dip into your pension like a bank account’ has numerous risks, not least of which is running out of money in retirement.
The management of retirement finances is vitally important and when looking decades ahead, factoring in the potential need for long term care, can be complex to calculate and manage. Questions such as where to invest, how to avoid paying unnecessary tax and reviewing how much income to take to avoid running out of money are key issues which have to be part of a forward-looking financial strategy.
Independent Financial Advice can help manage the pension pot in a sensible manner while mitigating investment risk.
Two safeguards we recommend anyone using drawdown puts in place are Lasting Power of Attorney (LPA) and making a Will. Put simply, an LPA gives a trusted friend, relative, or an appointed solicitor the legal authority to act on your behalf if you are not mentally capable of looking after your own affairs. Having an up-to-date Will in place makes it easier for those looking after your affairs to know who you would like to benefit from your wealth.
This is another benefit of using an Independent Financial Adviser to help manage drawdown, because if something does happen, not only is there a strategy in place but your adviser can work with the person charged with looking after your affairs to ensure income is maintained, which can be vital if long term care is needed.